Buy your next home with a HECM for Purchase
Downsize, rightsize, or move closer to family with one loan and one set of closing costs. Here's how the HECM for Purchase actually works.
A reverse mortgage to purchase a home. How does that work?
A reverse mortgage purchase, or HECM for Purchase, lets seniors 62 and older buy a new home using HECM loan proceeds. The big win: the whole thing runs on one set of closing costs instead of two. Without this program, you'd buy the home first and then get a reverse mortgage on it later, and you'd pay for closing twice.
The program was created by the Housing and Economic Recovery Act of 2008 and went live on January 1, 2009. All the normal HECM rules apply, plus a handful of additional rules specific to purchase transactions.
HECM for Purchase, explained
A quick walkthrough of how buying a home with a HECM actually works, straight from a specialist.
What you need to know upfront
Here are the ground rules that shape every HECM for Purchase transaction. Everything else builds on these.
You can purchase an existing 1 to 4 unit property.
The property must serve as your principal residence.
Once the HECM purchase closes, no additional liens are permitted. The lender is in 1st position, HUD in silent 2nd.
You provide a monetary investment at closing from an allowable funding source (details below).
You must occupy the property within 60 days of closing.
New construction must have a certificate of occupancy issued by the time the loan is insured by FHA (endorsed).
A HECM for Purchase differs from a traditional HECM in a few key ways: eligible property types, cash required at closing, involvement of a real estate agent, the recommendation of a professional home inspection, and certain closing costs.
Which properties qualify?
Not every home is eligible. Here's the short list of what works and what doesn't.
Eligible Properties
- Same as federally insured reverse mortgages or standard HECM loans (single family, townhouses, 1 to 4 unit owner occupied, FHA approved condos).
Ineligible Properties
- Cooperative units
- Manufactured homes (in certain circumstances they may be eligible)
- Bed and breakfast properties, boarding houses
From picking a home to closing
Four moving parts to a smooth purchase. Here's what each one looks like.
Home Inspection
- Suggested by HUD, not required
- Evaluates structure and mechanicals
- Flags repairs needed before closing
- Estimates remaining useful life of major systems
- Buyer should attend to ask questions
Required Repairs
- Health, safety, and structural issues only
- Completed by the seller before closing
- Included in the purchase agreement
- Buyer cannot pay for repairs before owning
Writing the Offer
- Offer contingent on a satisfactory inspection
- Attorney review may be worth the added cost
- Buyer may cancel prior to closing (may affect earnest money)
Closing Costs
- Standard HECM closing costs
- Plus recordation fees
- Plus transfer taxes
- Varies from state to state
Thinking about buying your next home?
Get an EstimateThe questions I get about HECM for Purchase
These are the ones that come up almost every time. Click any question to expand the answer.
At closing, HECM borrowers provide a monetary investment. That amount covers the difference between the HECM principal limit and the sales price of the property, plus any HECM loan related fees that aren't financed or offset by other allowable FHA funding sources.
Put simply: the proceeds from the reverse mortgage, combined with any funds from the sale of your old property (or from your savings), must be enough to purchase the new property outright. You can also provide a larger investment to retain a portion of your HECM proceeds for future draws.
- Your own money or money obtained from the sale of assets
- Withdrawals from savings or retirement accounts
- Credits up to 6% of the sales price from an interested party such as a seller, builder, developer, real estate agent, mortgagee, third party originator, or any combination of parties with an interest in the transaction
Lenders are required to verify the source of all funds before closing. Verification of deposit and the most recent bank statement typically cover savings and checking. If there's a large recent increase in an account, or the account is new, the lender will need a credible explanation of where the funds came from, documented in the FHA case binder. Missing documentation can delay endorsement or trigger a rejection.
- Closing cost assistance
- Credit card advances
- Secured or unsecured loans against another asset (car, home equity)
Borrowers cannot use a bridge loan (also called gap financing) or any other interim financing to meet the monetary investment requirement or pay closing costs. That restriction covers subordinate liens, personal loans, cash advances from credit cards, seller financing, and any other lending commitment that can't be fully satisfied at closing.
A written agreement is worth considering. It should include contingencies for the sale of your previous home, the home inspection, and anything else specific to your situation. A good agent who understands reverse mortgage transactions makes the whole thing move a lot smoother.
- There is no three day right of rescission on a HECM for Purchase, unlike a traditional HECM. All initial advances may be disbursed on the day of closing by the settlement agent.
- Seller contributions are now allowed (see eligible funding sources above).
- Existing HECM borrowers who do a HECM for Purchase transaction are not eligible for a reduction of the upfront MIP. The transaction is entered into FHA Connection as a new HECM.
- HUD approved housing counseling agencies that provide reverse mortgage counseling must counsel HECM for Purchase clients on all applicable topics.
- The property must be the borrower's principal residence, construction must be complete and a certificate of occupancy issued by endorsement or the lender's deadline, and any construction financing must be satisfied so the HECM liens are in first and second position with no other liens at closing.
A word on property flipping
To prevent property flipping schemes, only current owners of record may sell properties financed with FHA insured mortgages. A resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing. For resales between 91 and 180 days where the new sales price exceeds 100% of the previous sales price, FHA requires additional documentation validating the property's value.
If a lender suspects a senior has fallen victim to a property flipping scam, they contact the Processing and Underwriting Division of the local HOC. Complaints can also be reported to HUD's Inspector General Hotline at 1-800-347-3735.
Ready to explore your next home?
Whether you're rightsizing, moving closer to family, or just curious what's possible, I'll walk you through it.
This advertisement does not constitute financial advice. Please consult a financial advisor regarding your specific situation. There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrowers are still responsible for paying property taxes, homeowner's insurance, and maintaining the property to HUD standards. Failure to do so could make the loan due and payable. Credit is subject to age, income standards, credit history, and property qualifications. Program rates, fees, terms, and conditions are not available in all states and subject to change.
*Borrowers must continue to pay property taxes, homeowner's insurance, and home maintenance costs.